Private Equity’s Top Value Lever: Outside Talent

Recruiting outside talent has helped PE firms and their portfolio companies outperform major stock indexes. At public companies, internal hiring rules the day. Hunt Scanlon Ventures managing director, Cody Crook, examines the end result of these divergent hiring strategies on value creation.

Most research on the CEO labor market looks at public company chief executives while largely ignoring CEOs in private equity funded companies. New research from Paul Gompers, the Eugene Holman Professor of Business Administration at Harvard Business School, contends this is skewing our views of value creation and the big role certain CEOs play in it. 

He filled this gap by studying the market for CEOs among U.S. companies acquired by private equity firms in large leveraged buyout transactions. Professor Gompers analyzed 193 companies acquired by PE firms over a six year period valued at $1 billion or more.

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71% of those companies hired new CEOs under PE ownership. Strikingly, three-quarters (75%) of the new chiefs were external hires, with 67% considered ‘complete outsiders.’ 

On the flip side, in a report on public companies conducted just two years ago, 72% of new CEOs in the S&P 500 were the result of internal promotions. 

The Pay Off

Picking an outside CEO seems to have paid off. The average PE fund formed between 2010 and 2016 outperformed the S&P 500 by 22%, according to the research. It also paid off for the CEOs. Chief executives of PE funded companies received lucrative incentives that often included up to 10% of equity upside. 

“The research is clear,” said Cody Crook, managing director of Hunt Scanlon Ventures. “Hiring from within often manifests itself in stagnant, slow growth environments. What PE operating partners have figured out is that talent – especially at the top of an organization – is the critical value creation lever. In case after case, that talent is injected from the outside,” he said.

“What PE operating partners have figured out is that talent – especially at the top of an organization – is the critical value creation lever. In case after case, that talent is injected from the outside.”

The findings suggest a highly active market for CEOs who bring fresh perspectives and ideas. “In a relatively new twist,” said Mr. Crook, “a growing number of chief executives and C-suite talent are coming on board fractionally or on an interim basis.” He said that trend is accelerating and opening up the qualified pool of potential outside candidates. “Private equity firms have taken note,” he said.

Why Search Firms, and Their Clients, are Embracing Interim Talent

But there is an odd twist as well that Mr. Crook examined in the Gompers’ research. “How ironic is it that the very public company management experience that outsiders bring to private equity is what is so highly valued and in such big demand?”

Looking Outside 

Why don’t more public companies go beyond their own senior executives when looking for top leaders? 

According to Mr. Crook, recruiters say time is the biggest enemy. “Networking, screening and interviewing external hires can create a major internal distraction and this is compounded when hiring for the CEO spot,” he said. “And what if you miss out on quality candidates within your own talent pool?”

“Private equity firms know instinctively to push the envelope and challenge the status quo. Outsiders bring new perspectives, innovative ideas, and unique solutions. They breathe new life, and more value, into companies.”

Finding the right culture fit can also be an impediment to seeking outside leaders. Recruiters also point to a longer onboarding process with external hires, said Mr. Crook. “Outside candidates have more to learn, and that can take valuable time as they come up to speed. External hires are also likely to cost more,” he noted.

But the value that external hires bring to the top of an organization far outweighs all of this. “When you need new insights and better approaches and a clear-eyed look at the business through a wider lens, nothing beats an outside CEO coming in to shake things up,” he said.

“Private equity firms know instinctively to push the envelope and challenge the status quo,” said Mr. Crook. “Outsiders bring new perspectives, innovative ideas, and unique solutions,” he said. “They breathe new life, and more value, into companies.”

Article By

Cody Crook

Cody Crook

Managing Director, Hunt Scanlon Ventures

Cody Crook is managing director and head of investment strategy at Hunt Scanlon Ventures - an M&A advisory firm that specializes in the human capital space. Cody is responsible for co-managing the firm's investment portfolio, which includes executive search, talent acquisition, private equity, and investment firms. Leading the investment team, he spearheads all fund transactions and maintains portfolio developments. He is also responsible for sourcing, managing and monitoring investments and working with external portfolio managers, analysts and investors on active and prospective transactions. Connect with Cody.

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